Apple Rides iPhone Frenzy

Quarterly Profit Nearly Doubles as Tech Giant Taps China, New Markets

Apple's quarterly profit nearly doubled thanks in part to strong sales of its iPhones and iPads. MarketWatch's Dan Gallagher talks about the results and potential market reaction.

By

Jessica E. Vascellaro And

Ian Sherr

Updated April 24, 2012 10:42 p.m. ET

Apple Inc.AAPL-0.87%'s quarterly profit nearly doubled as iPhones and iPads continued to fly off shelves, putting to rest recent worries that the company can't maintain its momentum.

Shares gained more than 7%, or $40.55, to $600.83 in after-hours trading Tuesday—after falling in 10 of the past 11 regular trading sessions amid concerns about a potential iPhone slowdown. Instead, iPhone shipments jumped 88% in the quarter, as Apple continued to penetrate new markets like China.

Sales of Apple iPhones and iPads in greater China are skyrocketing, with five times as many iPhones sold in the latest quarter as a year earlier. How far will China take Apple? The WSJ's Deborah Kan speaks to Dow Jones' Yun-Hee Kim.

Apple is the most valuable company, but it isn't the best gauge of the health of the global economy. Overall corporate earnings results have been strong but uneven: General Electric Co. said last week that its operating earnings were up; International Business Machines Corp.IBM0.64% reported a higher profit, but a drop in sales of computer hardware raised questions about technology spending by businesses and governments.

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Apple's success comes as it rides the proliferation of smartphones that are reshaping the technology landscape. But unlike some other players, Apple is also driving the changes with products it is able to convince consumers and businesses to buy despite a sluggish economy. In particular, Apple's gains have come at the expense of one-time giants such as Research In Motion Ltd.

The quarter's results also suggest that Apple is on its way to doing what the 36-year-old company has yet to do: build a product that has strong and steady demand world-wide. Its Macs and to some degree iPods haven't taken off around the world the way that its iPhone is proving it can.

Meanwhile, Chief Executive Tim Cook has taken steps to deal with Apple's growing scale. In March, he said he would put Apple's cash pile, long a subject of consternation among shareholders, to use via a dividend and stock buyback. Apple said it would issue the dividend in the quarter beginning in July and begin a $10 billion share-repurchase program the following quarter.

Still, analysts said Apple's stock could go on a bumpy ride in coming months, particularly as competitors like Nokia Corp.NOK0.28% and Samsung Electronics Co. rush to market with devices during a window when Apple isn't expected to push a new phone.

Analysts predict Apple will launch its next iPhone in the fall, about a year after the 4S model. Expectations for Apple's stock are still lofty, with some analysts having 12-month price targets approaching $1,000 a share.

Over the quarter, the nearly five-year-old iPhone remained Apple's key driver. Apple said it sold 35.1 million of the smartphones, up from 18.65 million units a year ago. The device and related products and services formed 57.9% of Apple's sales, up from 52.7% last quarter. The company said its latest iPhone is now available in more than 100 countries and at 230 wireless carriers, up from 90 countries and 186 carriers as of March last year.

On a conference call, Chief Financial Officer Peter Oppenheimer said iPhone sales in greater China were five times the level of the year-ago quarter.

The results were an encouraging sign of how the hit device would fare outside the U.S., particularly in less affluent countries where smartphone growth is increasingly shifting.

"Smartphone growth domestically is slowing because we have reached a saturation point," said Peter Misek, a managing director at Jefferies & Co. He said Apple should be well-positioned in other markets given the strength of luxury brands in countries like China.

The Cupertino, Calif., company posted a 94% profit jump to $11.6 billion and a 58.9% revenue increase to $39.2 billion for the first three months of the year from a year earlier. While the numbers showed a slight deceleration from growth rates the quarter before, the results were well above analyst estimates of $9.52 billion in profits on revenue of $36.8 billion, according to Thomson Reuters.

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Apple continues to prove it can fight off intensifying competition in the smartphone and tablet computer markets. Pictured, a Toronto store.
Reuters

Sales of the iPad over the quarter were lower than some analysts had forecast, but up more than 150% from a year ago to 11.8 million units. Apple introduced a new iPad model during the quarter.

Mr. Oppenheimer said Apple is "selling the new iPad as fast as we can make them." Demand, he said, is "staggering."

Apple also sold four million Macs during the quarter, up 7% from a year ago. Meanwhile, iPod sales continued to decline, with 7.7 million units sold in the quarter, down 15% from a year ago.

During the call, Mr. Cook gave his strongest public hint yet that he'd be willing to settle the sprawling legal battles started by his predecessor Steve Jobs. "I've always hated litigation and I continue to hate it," he said. Apple and Samsung recently agreed to enter settlement talks in a California patent case.

Mr. Cook also brushed off some competitors' approaches. When asked about whether Apple's tablets and laptops might converge—a model Microsoft is pushing with Windows 8—he said: "You can converge a toaster and a refrigerator, but those things are probably not going to be pleasing to the user."

Apple's guidance for the current quarter ending in late June—revenue of about $34 billion and earnings per share of $8.68—was lower than analysts expected, as it usually is. Mr. Oppenheimer said the numbers reflect how the company was able to fulfill demand for the latest devices more quickly, minimizing the spillover of sales into the next quarter.

Apple's cash hoard grew to $110.2 billion as of March 31, up from $97.6 billion at the end of December. Its closely watched gross margin, rose to 47.4% from 41.4% a year earlier.

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